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Will Housing ETFs Continue to Suffer From Rising Material Costs?

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The latest housing data continues to reflect growing struggle of homebuilders with respect to soaring softwood lumber prices and other material and labor costs. According to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts climbed 3.6% to a seasonally-adjusted annual rate of 1.572 million units in May. The reading lagged analysts’ expectations of 1.630 million units, per a Reuters’ poll. Notably, housing starts jumped 50.3% on a year-over-year basis.

Building permits, a construction pointer for the coming months, decreased 3% month over month to a rate of 1.681 million units in the last month. The metric was up 34.9% on a year-over-year basis.

There was a 4.2% rise in single-family homebuilding, which constitutes a large portion of the housing market, to a rate of 1.098 million units in May. Meanwhile, permits to construct single-family homes declined 1.6% to 1.130 million units in the period, per the sources.

Going on, housing starts for the multi-family housing segment rose 2.4% to 474,000 units last month. However, permits declined 5.8% to a pace of 551,000 units in May for building multi-family homes.

Commenting on the housing scenario, Robert Frick, corporate economist at Navy Federal Credit Union in Vienna, VA, has said that "Shortages of materials and labor have builders struggling to increase production of new homes, though the demand remains strong. Potential home buyers should expect tight inventories and rising prices for both new and existing homes for the foreseeable future," per a Reuters article.

Rising Materials Cost Remains a Headwind

The U.S. housing sector has pleased investors with impressive performance amid the tough pandemic times. In fact, residential construction investment rose double digits since the third quarter of 2020, per a Reuters article. Moreover, market experts expect the housing sector to contribute modestly to gross domestic product growth in the second quarter.

However, it seems the space is now facing the brunt of rising lumber prices. Rising softwood lumber, material and labor costs continue to be a major hurdle for homebuilders. The supply chain disturbances caused by the lockdown to contain the coronavirus outbreak have also led to a rise in concrete, metal products, appliances and other expenses, as mentioned in a FOX Business article.

Notably, there was a 154.3% year-over-year rise in May in prices of softwood lumber, which is used for constructing frames and trusses of houses, per a Reuters article. Moreover, there was a sharp rise in prices of plywood. Going on, scarcity in supplies of copper along with tariffs on steel imports are also increasing the building costs. Moreover, scarce supplies of semiconductors globally have resulted in shrinking supplies of some appliances, per a Reuters article.

These factors are affecting affordability as prices of existing and new homes are soaring. Notably, house prices soared by the most in more than 15 years annually, increasing worries that some first-time buyers might be priced out of the market, as stated in a Reuters article.

Also, low employment levels might impede momentum of the U.S. housing market.

Housing completions also declined 4.1% to a rate of 1.368 million units in May. Moreover, it is expected that the housing supplies crunch will remain as the number of homes authorized for construction but not yet begun increased to the highest level since 1999, per a Reuters article. This factor is also expected to increase housing price inflation for a while.

Meanwhile, the housing market has steadily benefited from changing demographical preferences of a large chunk of population as people increasingly looked for work-from-home-friendly properties. Notably, individuals were shifting from city centers to suburbs and other low-density areas looking for spacious accommodations for home offices and schools, per the sources.

Commenting on the current market conditions, Charlie Dougherty, an economist at Wells Fargo in Charlotte, NC, has said that “New residential construction remains strong, but building material pricing and availability are likely to remain significant headwinds," as mentioned in a Reuters article.

Housing ETFs That Might Suffer

Against such a backdrop, here are a few housing ETFs that might suffer amid the current housing sector scenario:

iShares U.S. Home Construction ETF (ITB - Free Report)

This fund provides exposure to U.S. companies that manufacture residential homes by tracking the Dow Jones U.S. Select Home Construction Index. With AUM of $2.60 billion, it holds a basket of 46 stocks, heavily focused on the top two firms. The product charges 42 basis points (bps) in annual fees (read: Core Inflation at 29-Year High: 6 ETF Areas to Benefit).

SPDR S&P Homebuilders ETF (XHB - Free Report)

A popular choice in the homebuilding space, XHB, follows the S&P Homebuilders Select Industry Index. The fund holds about 35 securities in its basket. It has AUM of $1.89 billion. The fund charges 35 bps in annual fees (read: 5 ETFs That Skyrocketed During Biden's 100 Days in Office).

Invesco Dynamic Building & Construction ETF (PKB - Free Report)  

This fund follows the Dynamic Building & Construction Intellidex Index, holding a basket of well-diversified 30 stocks, each accounting for less than a 5.55% share. It has amassed assets worth $298.7 million. The expense ratio is 0.59%.

Hoya Capital Housing ETF (HOMZ - Free Report)

The fund seeks to provide investment results that before fees and expenses, correspond generally to the total return performance of the Hoya Capital Housing 100 Index, a rules-based Index designed to track the 100 companies that collectively represents the performance of the U.S. housing Industry. It has AUM of $72.6 million. The fund charges 30 bps in annual fees (see all the Materials ETFs here).

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